Sierra Preps Its Debut Subprime Auto Loan Securitization

Sierra Auto Finance, a subprime auto lender founded by a former executive of Exeter Finance, is making its debut in the securitization market.

The firm is headquartered in Dallas, Texas, was formed in March 2012 and is controlled by Emerald Development Managers, a venture capital firm. Other owners include RRE Ventures, SF Capital Group, and the company’s management, Samuel Ellis and Brett Beebe.

As of April 30, Sierra had originated $441.5 million in receivables and had an aggregate outstanding portfolio balance of $249.5 million.

While the company’s operating history is short, its management team has extensive experience in the auto finance and subprime auto industry, according to Kroll Bond Rating Agency. Ellis, the auto lender’s co-founder, president and chief executive, also founded and was CEO of Exeter from April 2006 until September 2010. While at Exeter, he led the original executive team that helped build Exeter and grow quarterly originations to $20 million in the third quarter of 2010. Ellis also worked in the risk management groups at AmeriCredit Corp., oration (“AmeriCredit”) and Summit Acceptance Corp.

The other members of the management team have backgrounds in corporate finance, compliance, servicing and implementing scorecards and have worked at auto finance companies such as Exeter, AmeriCredit and and Summit Acceptance.

The company has yet to turn a profit -- as of March 31, it had a negative net income of $2.2 million, according to KBRA. However management expects to be profitable in 2016 as its initial originations mature and the company achieves economies of scale. It received an additional equity contribution in August 2015, which enabled it to expand into new markets, hire more employees and increase capital expenditures.

In November, 2015, the company extended the term of its warehouse facility with Wells Fargo for two years and increased the size of the facility from $150 million to $200 million.

Sierra focuses on lower quality subprime obligors with an average FICO score typically ranging between 500 and 620. In this transaction, approximately 15.6% of the principal balance of loans have no FICO score and 12.86% have a FICO score of less than or equal to 475. The weighted average FICO score is 537 with 66.18% of obligors having FICO scores ranging from 476 to 625.

However, the collateral in this transaction has been seasoned by approximately 12 months seasoned; this tends to reduce risk as more loans go bad early in their terms than late in their terms. KBRA’s expected base case cumulative net loss expectation for this transaction is 17.65%-19.65%.

The trust will issue three tranches of securities; the senior tranche, which benefits from 36.02% credit enhancement and matures in January 2022, is provisionally rated ‘A’ by KBRA; another tranche maturing in 2022 with 25.19% credit enhancement is rated ‘BBB’ and one maturing in 2023 with 15% credit enhancement is rated ‘BB.’

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.